Concerns over iron ore index pricing

NDRC has expressed concerns the volume of ore traded on a purely “spot” basis is too small.
Photo: Bloomberg

by
Ayesha de Kretser

Iron ore buyers believe China’s National Development and Reform Commission has justifiable concerns over the index pricing system being open to manipulation by the big three miners
BHP Billiton
,
Rio Tinto
and Brazil’s Vale, as well as traders.

The NDRC, China’s peak planning bureau, caused shockwaves in the industry on Thursday after saying miners and traders had been buying back cargoes from the spot market to help lift prices higher. The government body expressed concerns the volume of ore traded on a purely “spot" basis was too small.

“Major foreign miners . . . will also come up with a small amount of iron ore to tender transactions," the NDRC said. “In this opaque bidding process, the iron ore price is pushed higher."

BHP denied claims the spot tendering process is “opaque".

AFR
AFR

“We aim to improve transparency by increasing liquidity in the spot market. We sell significant volumes on a spot basis, including through widely accessible trading platforms, irrespective of the iron ore price," a spokeswoman said.

NDRC formalises long-held suspicions

But an executive in the raw material import department at one of China’s biggest mills said the NDRC had formalised suspicions held by industry participants for months. “I think they must actually have some proof now to be making this statement," he said.

The mill executive said a group of traders was believed to be working in concert to prevent heavy losses seen last year when the value of their iron ore inventories plunged dramatically in the period from July to September.

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“I think that group would represent about 10 per cent of the spot market already," he said. “They try to control prices, if it gets to $US160 [a tonne] they sell cargoes to keep it where they think it should be. If it was just one trader they couldn’t do it."

The NDRC said a number of factors were behind the spike in iron ore prices from a low of $US87 a tonne in September to more than $US160 a tonne by February. These included a rush to restock iron ore supplies after a period when mills cleared inventories to bolster depleted cash reserves and lower supplies of iron ore due to the rainy season in Australia and Brazil.

Lending support to the NDRC’s claims, Morgan Stanley analyst Joel Crane said big three producers BHP, Rio and Vale “appear to have offered a lower than average amount of spot cargo" from December to February.

“A number of factors conspired in recent months to deliver unusually tight spot market conditions," Mr Crane said. “While the Australian producers were likely responding to market conditions, Vale tends to rein in spot shipments over the Amazonian wet season."

China, India key players

But Mr Crane said the most important factor was “an extraordinary dearth of material" from China’s domestic concentrates and from India. Until very recently India had provided the vast majority of seaborne spot sales, but a ban on key supply centres Karnataka and Goa has hurt global trade and given more pricing power to the big three.

“In India, the latest data indicate exports are currently annualising at about 12 million tonnes compared with 47 million tonnes in 2012 and 77 million tonnes in 2011," he said.

“Although we do believe exports will pick up in the second half of the year as there will be some easing in the restrictions in Goa, our forecast of 20 million tonnes in calendar year 2013, this 60 per cent decline in seaborne supply will contribute to tight market conditions."

Rio Tinto has been stockpiling iron ore ahead of its Cape Lambert port expansion due in quarter three of the calendar year, limiting its sales into the spot market.

A major iron ore trader based in Hong Kong said his firm followed strict anti-trust rules and would never share information about purchasing, but the big miners had full control over the spot market now that India has disappeared as a supplier.

“If one of those guys wants to move the index they can offer out a few spot cargoes above the price and it will go higher," he said. “There are very few cargoes offered on spot."